Unchained - Why CoinFund Believes Worldcoin Could Become More Popular Than Bitcoin - Ep. 525

Episode Date: August 1, 2023

CoinFund’s Jake Brukhman and Chris Perkins join Unchained to dissect their recent $158 million seed round and the transformation of the investment landscape following the 2022 crypto carnage. As backers of Worldcoin, they confront criticisms about the project's approach of distributing money to individuals who may not fully comprehend the underlying technology. They also delve into why the Coinbase lawsuit could potentially boost the industry, share their perspectives on current crypto legislation, and explore the intersection of AI and crypto. Listen to the episode on Apple Podcasts, Spotify, Overcast, Podcast Addict, Pocket Casts, Stitcher, Castbox, Google Podcasts, Amazon Music, or on your favorite podcast platform. Show highlights: how the fundraising crypto environment changed this past year after the 2022 carnage what the impact of FTX’s alleged fraud has been  why Chris and Jake believe that the SEC’s lawsuit against Coinbase is bullish for the industry why Jake believes there's no massive consumer application in web3 yet how institutions have been building during the bear market whether Worldcoin solves the sybil resistance problem in crypto and whether it could become more decentralized than Bitcoin Jake's response to the criticism surrounding the centralization and privacy issues in Worldcoin the ethical implications of giving free money to people who may not fully understand how their biometric data is being used what the Composite Ether Staking Rate (CESR) is and what are its two main applications how the foundational web3 + AI intersection is happening in the compute area why Chris believes that the crypto market structure bill is not perfect whether creating proper stablecoin legislation is a very important opportunity for the US how DeFi should be regulated to ensure that privacy gets protected Thank you to our sponsors! Crypto.com Arbitrum Foundation TOKEN2049 Guests: Chris Perkins, President of CoinFund Jake Brukhman, Founder and CEO of CoinFund Links Unchained:  Worldcoin Launches Token on Mainnet, Plans to Deploy 1,500 Eyeball Scanning Orbs Is Sam Altman's Worldcoin the End of People's Privacy? CoinDesk:  Worldcoin Could Enable Wider Distribution of Crypto Than Even Bitcoin, Says CoinFund,  Worldcoin Releases Tokenomics, Report Geofenced for Some Countries   The Block: What exactly is CoinFund's new Composite Ethereum Staking Rate What do I think about biometric proof of personhood? By Vitalik Buterin CoinDesk Indices and CoinFund Announce CESR, the Benchmark Rate for Staking on Ethereum CoinFund Reinforces Commitment to Web3 Technology with the Close of $158M Seed IV Fund Learn more about your ad choices. Visit megaphone.fm/adchoices

At some point, we can get to a billion users, we think, in WorldCoin. And that would probably make it more widely distributed at Bitcoin. Hi, everyone. Welcome to Unchained. You're an ohiped resource for all things crypto. I'm your host, Laura Shin, author of The Cryptopians. I started cribbing crypto eight years ago, and as a senior editor of Forbes, was the first Mainstream Media Reporter to cover cryptocurrency full-time. This is the August 1st, 2023, L4th.

episode of Unchained. Asian's buzzing and everyone's going to Token 2049 Singapore on September 13th to 14th. Balajee Srinivosin, Mike Novagrats, Arthur Hayes, and 200 others will hit the stage, joining over 10,000 attendees. Visit token249.com for 65% off with the code Unchained. Link in the description. Arbitrums leading layer two scaling solutions can provide you with lightning fast transactions at a fraction of the cost, all while ensuring security rooted on Ethereum. Arbitrinsinsuring, Arbitrim's newest edition, Orbit, Enables you to build your own tailor-made Layer 3. Visit arbitram.io today. Buy, trade, and spend crypto on the Crypto.com app.

New users can enjoy zero credit card fees on crypto purchases in the first seven days. Download the crypto.com app and get $25 with the code Laura. Link in the description. Today's guests are Jake Bruchman, founder and CEO of Coin Fund, and Chris Perkins, president of Coin Fund. Welcome, Chris and Jake. Hi, Laura. Thank you for having us. You recently closed your $158 million seed four round.

Given the year we had in 2022 and being in this sort of post-FTX, post-Gazillion crypto-bankruptcies world, what was it like trying to raise during this period? And how did it compare to previous raises? I definitely think that throughout 22 and into 23, the fundraising environment for institutional investors who are looking at crypto managers has been extremely challenging. So in the beginning of the year, you had the crash of Luna and BlockFi and 3AC. You had kind of a bare market throughout the year with public market prices dropping

and eventually toward the end of the year, private market prices catching up and dropping as well. And then, of course, in November, you had this catastrophic FTX scenario that we all, you know, live through as an industry. And what Chris and I are so proud of on behalf of our team is that throughout that period, we managed to raise about 550 million bucks. This is really a testament to, first of all, the professionalization that Coin Fund has been going through over the last couple of years, a testament to our IR team who has built institutional relationships over the last number of years that led up to being able to engage.

larger institutions this way and close them. And also a little bit of the strategy of what products we're kind of offering and how we're offering them. So we're extremely proud to be well capitalized and really bullish on crypto, even though the market right now is somewhat uncertain, somewhat sideways, a lot of the regulation. Laura, as you know very well, is being figured out in real time. but we are more aligned than ever to support and champion our portfolio companies. What do you think, Chris? Yeah, we're going on our ninth year as a crypto-native firm.

And I think that's a pretty cool accomplishment. And we also wanted to, again, thank our team. If you look at our previous vintage, Seed 3, that was $83 million. And with this raise, we actually approached our caps. You don't want to have a humongous pre-seed seed fund where your asset gathering. So, you know, we like to stay precise in our investments. And, yeah, we calibrate it right to the cap. So very, very proud of the team.

And again, people like Jake, the team, this is not our first rodeo. Been through many, many cycles. And it's not a bad time when you're hitting a cyclical bottom to do what we're doing. And did investors seem more skittish at all because of the bankruptcies? And, you know, Jake, I think you called the FPX thing, a scenario. I was like, well, that's one way to put it. But obviously, you know, a sort of made off level alleged fraud is a huge black eye for the industry. So how did that come up in conversations, if at all?

Yeah, I mean, I would say it absolutely had an impact. You know, in the beginning of 22, I think a lot of institutional investors took a step back, first of all, because of Luna in particular and more broadly because of the kind of, a broader macro environment that was impacting not just crypto investments, but really investments across the board into venture funds and technology and so forth. And when FTX happened, that was really, that really took the cake. I think a lot of institutional busters just stopped writing checks at this point. You know, we've definitely had some relationships that were, you know, tracking. But then upon that event happening, you know, took a significant step back. And Laura, FTX was a debacle, but even something as simple as this coin-based lawsuit between them and the SEC this year, which actually I see is almost like a bullish thing for the industry, that event alone also has tempered some investment in, you know, at the present time.

Wait, I'm sorry, you said that you view the lawsuit by the SEC against Coinbase as bullish for the industry? Well, yeah, I think in the wake of the ripple decision, what has happened is the Coinbase sort of win has become a little bit more probable and hopeful. And I think that the Coinbase lawsuit goes to, you know, exactly the core issue that I'm guessing, you know, the judicial system will help us decide in the case of crypto assets, which is whether tokens are securities. So let me just chime in, Jake. I think it's pretty clear that the industry is maturing. And the companies that are able to navigate the stress that we've experienced, they've built really strong foundations and they're emerging out of this much stronger.

You know, I do agree with Jake that the Coinbase case is ultimately going to be resulting in a net positive for the industry because we're marching on a road path to clarity no matter what. And people like Coin Fund, we've always been supportive of regulation. We've been supportive of principles-based regulation. And what we're seeing now is that, look, massive amount of things happening in Congress right now, there are some major questions. There are some major questions in how this should be regulated. Coinbase makes that case very clear. And either way, whether we go through the courts, whether we go through what we'd prefer, frankly, which is the legislative outcome, we're going to get some clarity. We're hopeful that it's principled and nuanced.

But all we want to do is to take this black cloud away from our entrepreneurs and allow them to do it, do best, which is build. And so whether it takes a couple of years and we get that clarity in the court or if our Congress jumps into action, by the way, great episode with Congressman Torres yesterday. I thought he articulated it very thoughtfully. We literally released that like four hours ago, so I'm so impressed that you already listened to that. Well, Laura, Chris is often modest, but he does a tremendous job on behalf of coin fund,

keeping up to date, you know, with the latest in Washington, with all of these interviews like the Torres one, we just alluded to, and also testifying at the CFTC and sitting in some of their committees. Thanks, Jake. So one thing is, I think both of you kind of said that you felt Coinbase, having a decision in Coinbase would be positive. And I feel like, Chris, you might have said, even if it's, you know, even if it goes against Coinbase simply because of, you know, it will bring clarity. Is that, so like even if it's a decision against Coinbase, you feel like that will still be helpful? I think there's a lot of nuance and we're going to go on a really interesting winding road.

And frankly, we do have a generational divide amongst many of our policymakers. We still believe that embrace of crypto is and can be and will be bipartisan. It's more generational. And so, you know, we feel good about the direction of travel with Coinbase. We also feel good about the direction of travel with legislation. I think the point is that time is on our side, and we do feel comfortable that we're going to end up in a decent place. You mean time is on your side simply because it's taken so long that finally something has to happen. Well, when you're dealing with a generational divide, the generation that understands the nuance and the opportunity of Web 3 will eventually be in power by the laws of nature.

And again, we're pretty confident we're going to be in a good place. Yeah, yeah, that's what Congressman Torres said, basically. So as, you know, we've been discussing, like, obviously you did this raise, and it's kind of a historic time in crypto, like this post-22 post-FTCs is definitely a sort of unusual time in crypto. So just when you look at the long arc of crypto development, where would you say the industry and the technology are right now in terms of adoption? And then when you think about that, how does that influence how you'll be deploying these funds you've just raised? Yeah, thanks, Laura. I mean, I think I remember mining Ethereum in 2015 and thinking like, oh, man, well, you know, we're just starting the network now. But in 2016, we're going to have so many apps and going to market.

And now our estimate is more like 2026, right? So there's like a 10-year delay there between truly go-to-market. But I think what we've seen is definitely that there has become a lot more consumer technology that founders are building and more sophisticated founders that have come in, especially over the last two, two-and-a-half years from Web 2 to build some of these go-to-markets. And examples of that in our portfolio, and I would say we probably invest in like 10 to 20% of our portfolio. is looking at kind of consumer, but mostly that's been gaming related to NFTs. It's been sort of SaaS software, such as kind of analytics platforms that surface blockchain data and probably also a couple of go-to-markets that are trying to bring defy or NFTs,

those kind of core value propositions to the market in a way that like normal people can use and of course onboarding tools as well. So I would say there's definitely been an increase in sort of consumer focus in the space, but have we seen this incredible killer app that everybody wants to use? I don't think we've seen that. And I invite us to think about, like I tweeted this the other day, like think about chat GPT. This is an application that has some very interesting properties. Number one, you can use it in a sense.

second. Number two, you could explain the value proposition in a second. And number three, everybody wants to try it, right? Like, it's AI. It's like the new cool thing. And so I would, I would offer that, like, we don't have any Web3 app that has those three properties at the same time. We've made apps that are easy to onboard onto, and we might have even made apps that people want to try. But, like, you know, we really need kind of all three of those things. you know, to create, to create that kind of growth. So what do I think those apps might be in the future? Well, I think, Laura, honestly, it's probably the things that we always suspected all along. I think we can create, and Brian Armstrong tweeted about this the other day,

very, very cheap payments globally, you know, using blockchains. And that should be something that everybody wants to use because moving money these days is not exactly cheap. It's expensive relative to the state of our technology. And the other big use case that I've been thinking about, especially this week as one of our portfolio companies, World Coin, has launched officially and globally on Monday, is this idea of just global decentralized identity of which WorldCoin, I think, could be a really interesting foundation. And so there's a lot of initiatives on that side of the space.

and there's a lot of applications like global UBI that could be incredibly impactful for the world. So I think both of those areas are kind of what we've always talked about in crypto as being very disruptive. And they're actually starting to come to market now. And I do want to ask you, of course, a ton about WorldCoin, but I do want to just quickly ask you also. I mean, the ability to do cheap blockchain payments has been around since 2009. So why is it that you think that use case still hasn't taken off? I was going to just jump on what you said, Jake. And I think I love the way you talked about foundational infrastructure building.

Now, next phase is going to be applications. But this is related to your question, Laura. Institutional adoption is another major theme that I think we're going to see in the next cycle. And people have been debating it. Oh, the institutions are here. Oh, they're coming. Oh, they're never coming. But what's happening now is during the bear cycle, the institutions have their teams, their blockchain, sometimes it's a DLT team. And during bull markets,

they would kind of the light bulb would go on and they'd jump over to the crypto space because you know, they realized what was happening. I think during the bear, the institutions were building as well. And now these teams have stayed together. So we're starting to see more outputs from there. I sit on the CFTC's Global Markets Advisory Committee and we met a couple weeks ago. half the day was focused on tokenization and this whole influx of tokenization that we're going to see. Stable coins, in my mind, are the first, you know, real use case that's a cheap product market fit for payments, right? And, you know, what we think is going to happen is that you're going to see additional focus on stable coins. And look, we just had a bill that came out of committee yesterday.

As you get more regulatory clarity, then you'll see greater institutional adoption, which I think, will then facilitate, you know, more adoption. The tokenized FX markets are fascinating. FX trades $7.5 trillion a day. And to date, we only really have USD stable coins. I think 99.5% of stable coins or dollars. And so that's another theme that I think will also allow for payments as additional regulation crystallizes. And this tokenization theme really takes hold. Yeah, yeah, which totally makes sense. you know, everyday people in non-US dollar economies if they want to transact, even if it is an American sending them money, they will want to receive it in euros or whatever their local

currency is. So, all right. So let's chat about WorldCoin. Obviously, this is what everybody's been talking about this week. And I'm sure you're well aware. WorldCoin has faced quite a bit of criticism from the community. Before we dive into all that, you started to talk a little bit about this, but why don't you fill in more about what it was about WorldCoyne or this problem that you saw, you know, with proof of personhood that made you decide that this was the project you were going to invest in? Absolutely. So, you know, I believe it was in 2020 that we were really attracted to WorldCoyne's large global vision and really Web3-focused technology and kind of intuitively values at the end of the day.

Laura, I think World Coin solves just an absolutely key problem in decentralization technology. That problem is, of course, civil resistance or in plain language, being able to assign, you know, to one address the certification that that address belongs to a single human. And just to take us through, you know, a few use cases of what that implies. Well, first of all, it has profound implications for decentralized. governance and voting systems. Most voting systems in blockchain have been token weighted systems. They've been plutocratic. They've not always been fair.

They've been kind of compromised by whales at times. And having a proof of humanity will guarantee one person, one vote voting systems. You'll enable systems that are like very, very democratic. You can create one of the central ideas of World Coin is that if you can create a distribution of a digital asset that's extremely wide. You know, you can basically build a cryptocurrency that's bigger and more valuable than Bitcoin because, you know, we believe at the end of the day, Bitcoin holds its value because of global consensus around the fact that it is a, you know, kind of digital gold commodity

kind of asset. With WorldCoin, we think we can, and we wrote, you know, our analyst, Austin Barrack wrote about this in our thesis that we published in our blog. at some point we can get to a billion users, we think, in WorldCoin. And that would probably make it more widely distributed than Bitcoin. Using this platform, you could create things like fair token distributions, fair airdrops. I think it's a very interesting basis for, you know, reputation systems and identity in

general. Identity can't really be one thing. It's got to be segmented across, you know, many. different areas. But it's really interesting to have one digital basis in those segmented identities that is a public good, that lives on a decentralized network. One kind of pet use case that I love to think about is, guys, it's actually not that hard to solve the bot problem on Twitter or X.com as it's called these days. All you got to do is you have to verify that the users are humans. And that's the technology that WorldCoin offers. And finally, there's a reason why Sam Altman is actually kind of the originator of the World Coin idea coming from, you know, his work at OpenAI and in the

AI world. And he hasn't said exactly, you know, specifically what he sees the intersection there to be. But, but I can tell you what I think, which is that I believe Sam is thinking about World Coin IDs as a way, to govern AI in a democratic manner over the long term. And that's an incredibly futuristic and interesting use case. So for all of those reasons, we just thought, and the fact that the team is absolutely first class and fantastic and has built a technological device that is an absolutely new technology in the world, these are all the reasons why we think this is going to be a huge,

a huge success. And just to draw out what you were saying there, you were referring to how, when you talked about using WorldCoin to govern an AI, you were talking about this concept. People have been discussing a lot, which is like using a DAO to govern the development of these AIs. Is that what you're saying?

Absolutely, yeah. And that could mean governance over the data sets that are being used to train the AIs, like giving people the ability to opt in or opt out with their content or whether it's being used. It could mean trust and safety issues around AI, like what kind of like what are the limitations of a of a public AI that want to be observed in a particular situation? Maybe it's in a kindergarten.

Maybe it's in a government building. Maybe it's a public one. Maybe it's a private one. But all those things need, you know, custom governance depending on the context that they're in. And the thing that really excites me about kind of decentralized governance in general, Laura, is just that we're going to have a new class of public goods that we're going to be able to democratically govern. And those goods will be provided by blockchains, not by governments.

That's the really disruptive thing here. This is a team that's solving a real problem, right? And Jake articulated perfectly, it's the civil resistance challenge that we face. And we need it to be solved to move this industry. be forward. And as I think about my Web 2 life, I think about people that use clear or use their Apple face ID, as you start really unpacking and understanding how the team, the culture of the team, the focus on privacy, and what they're trying to solve, it makes a ton of sense. So I'm sure you know that French and Bavarian data protection regulators are probing WorldCoin

for, quote, questionable practices. There's a UK regulator that's issued a warning. You know, when you say they have a focus on privacy, like a lot of people really are concerned about the fact that, you know, World Coin is getting not only just certain people, but like kind of vulnerable populations, you know, these people in developing countries where,

you know, they're not from even like a wealthy part of the developing country. They're from a place where a financial incentive could get them to do something that, and I'm not saying that this is WorldCoin, but just like generally a financial incentive could get them to do things that maybe are not in their best. interest otherwise. And so I wondered what your response is to these critics who, you know, are questioning why it is that world point. Yeah, has been getting people to give them their

biometric data for money. Well, listen, Laura, this is, I'm so glad you asked this. This is obviously like a huge issue that a lot of people have brought up. And it's a big topic. And so I want to try to address, you know, as much of this as I can. One thing to say is like, one of the best articles to read on this is actually Vitalik Boutaren's most recent article, which is called What Do I Really Think About Biometric Proof of Personhood? And in that article, he does this incredibly scientific and thoughtful and dispassionate analysis of all the different proof of personhood systems that exist. And if you read the article, the conclusion that he actually comes to is that among the different

solutions, biometric-based proof of personhood is actually the most privacy-preserving solutions, assuming that it's architected that way, right? And like, to me, while we should be asking those questions and having those concerns, there's also a reality around how WorldCoin is actually implemented, actually architected. And I can tell you that if you look at those facts, it is going to be one of the most privacy preserving and web three values compatible proof of personhood systems that are out there. Now, Vitalik is also eyes wide open that there are centralization risks here. There's, for example, proprietary hardware, and that's currently being manufactured by a more centralized organization. But one of the mitigants to that is that the WorldCoin team have committed, you know, essentially to open sourcing everything that they're doing.

They're going through a process of progressive decentralization of the network of the protocol and eventually of the hardware as well, which is a huge challenge. And we're very eyes wide open that like almost nobody has done that before. and there's a variety of issues to solve there. But on a practical level, when you use this device, your biometric data is not stored and is not sent somewhere, it does not leave the device, it gets erased. The only thing that leaves the device is a hash, you know, the iris code. Now, what's so interesting is that, you know,

when you actually go to pay, you know, with your world, World Coin wallet, and you want to provide a proof of unique personhood, you're not even actually sending the public key of your World ID, the one that's generated from your Iris Code. You're sending a zero knowledge proof of the fact that you have a world ID, and it's, you know, in that set of unique humans, but you're not even saying, like, which one. And so, you know, if you start to look at the actual reality of privacy and WorldCoin, you start to realize this is the most Web 3 compatible proof of personhood that's really out there

because the next thing of similar strength is kind of like AMLKYC that you do with the proof of authority. And then on kind of the go-to-market to make, I know that WorldC spent a few years kind of going out to developing countries as a go-to-market and some people have raised issues with that. I mean, my position on that is, of course, like we deeply care about the fact

fact that we don't want those types of strategies to be abused, and there's always going to be people attacking the system. So WorldPoint is constantly evaluating those strategies, I think. And on this particular point, Laura, of having someone predatory kind of take someone's world ID, I think there's actually technological solutions to them. And again, Vitalik writes about this in his post. And the basic solution is, I think in the future, World Coin. hardware will be very widely available. And if I sell you my world ID, let's say, I will be able to then go to a WorldCoin device,

rescan, and create a new World ID, invalidating the first one, right? And so the credibility of being able to sell for profit to third parties, these IDs, I think we'll go to zero, right? I don't think people will buy them. But okay, maybe the way this was translated was maybe I, you know, miscommunicated it. But I think for scanning their irises with the orb, they then could receive tokens later or even actually money in their local currency.

So I'm not talking about them selling their ID. I'm talking about them like literally just making money from getting their eyeball scanned, right? Okay. Why is that a problem? Oh, because these are populations that they have. have a hard time getting money. And so they might just do something for the money without really knowing, you know, how it could affect them or like thinking carefully about, you know, what is this that I'm doing that, you know, I'm giving away my personal biometric information or, you know, not giving away, I guess, as you're describing. But still, they're having their personal

biometric data scanned in a way that, you know, they don't know much about WorldCoyne. Like, what if it gets hacked? What if their biometric data gets out there? They're doing something risky that isn't like something that's been battle tested. So I think I understand your question, but again, I disagree with the risky part perhaps, right? Because again, as we've described, the device takes incredible precaution to preserve privacy. So I don't think biometric data like could be stolen en masse, and I don't think that that risk is actually that high. If you go back to Web3 First Principles, I think that's one of the beautiful things of what we're trying to enable here, and that's access to financial services for the unbanked.

So, again, I guess I would push back as well, Jake, on saying, you know, paying people for something that they voluntarily do. I think it's important that we provide the right disclosures across the board. but again, based on the privacy that we expect to be achieved here, I think it's a terrible thing. I just want to clarify, Laura, is your question, are you saying that there's like a third party that goes to a person and says, you know, I'm going to pay you $30, you're going to give me an eye scan, and then subsequently like takes their air drop, which might be worth more than $30? No, no.

I'm just saying, like, did you read that MIT technology? review article. I am aware of it. And then it starts with, yeah, like the Indonesian guy, you know, he shows up and there's like a line of people that have been there since like early in the morning. I highly doubt that they like really understood what was going on. I think it was like, oh, we can get money for doing this thing. You know, like I used to live in Indonesia too.

You know, it's definitely a super different place. They're probably richer in happiness in Americans, but you know, it's not like New York City. So I just feel like when you throw in that kind of incentive, people, I don't know if they're necessarily fully educated about what's going on. I think they're just like, oh, like this company is going to give us money. I think that's a really valid point. And to be honest, I think like most of crypto is still unknown to like most of the world, right?

There's a huge education challenge, not just with, you know, world coin systems, but with how blockchains and cryptocurrencies work in general. And, you know, I do think that digital assets are volatile, and we're going to, you know, we're going to see how some of these airdrops and UBI performs and, like, other digital assets are likely to be volatile. So we'll have to find ways of mitigating those problems, too, right? But if we are not able to deploy the infrastructure for this and, like, run those experiments, make those learnings and create better systems, then I don't know how else we can, you know, we can make these. these impactful changes. Yeah, I know. I think you get where I'm going, though.

It's like, okay, experimenting on these people who may not really fully understand that they're the guinea pigs of this experiment. But anyway, so in a moment, we're going to go through a few more tough questions around WorldCoin, but first a quick word from the sponsors who make this show possible. Join over 80 million people using crypto.com,

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Hey, Jamal, you've been promoted to pack leader. Save the everyday with deals from Amazon. Back to my conversation with Chris and Jake. So the other thing that I'm sure you guys have heard about is the Samcoin aspect of the distribution of the World Coin token, which is, as far as I understand, I think I did the math right on this. There's about 5% that was issued. And if you look at kind of the amount issued versus the fully diluted value, it's just really insanely skewed. how or why, you know, did the World Coin team, and I don't know how much you guys were involved, but I wondered how you guys came up with that model and why you felt that that was the right way to launch.

Well, yeah, this is, you know, this is really a question best directed to the World Coin Team, Laura, and, you know, like we weren't directly involved in those designs. But, I mean, as investors that hold the coin, you guys didn't have any input. I mean, we had general input, but we didn't design the thing. So I would say there's a few things to say here. The intention of WorldCoin is to become, as I said previously, one of the widest distributed digital assets, right? So what you're kind of referring to, you know,

is the issue of a smaller float that I think starts to become resolved as more and more people kind of enter the system. There are some people who argued that, I think there was someone who argued that a 20% holdback was, you know, incredibly large. I actually disagree with that. I have over 105, you know, venture portfolio companies. And I know what the averages are in terms of holding back digital assets for investors. And I could tell you that 20% is very, very average. There are definitely companies that have had less.

I think LivePier had a 10% or so team holdback. There are companies that had significantly more, like over 50% holdback. I don't think 20% is, you know, is kind of as tough as some people are saying. Yeah, I don't think people are disputing that so much as the current circulating supply. And as I said, I think the current circulating supply is, you know, that issue becomes mitigated as the currency becomes more widely distributed. And Laura, remember, there's also kind of this periodic payment or UBI aspect to the currency. And so that actually continuously gets mitigated over time, you know, as multiple payments kind of make it out into the market. We're in the first week of the launch.

Okay, okay. But yeah, I still think it probably inflates the price of the coin from the get-go. All right. Switching topics, I know, you know, as you said, you guys weren't directly involved in that. So you are about to launch what you're calling CSR, the composite ether staking rate, and you're doing this in conjunction with CoinDesk Indices. Explain what that staking rate is, why having a benchmark staking rate is important, and what you think will be built using that. Thank you so much for the question. So CESR, we call it Caesar. If you think about finance, global finance, interest rates form the backbone. They form the cornerstone of global finance, right? And you think about

legacy rates, things like LIBOR, now SOFER or Fed funds, there are trillions and trillions of dollars of financial products that are built on top of these cornerstone rates. If you look at LIBOR, There were some problems with it, right? It was very much like Web 2. It was centrally controlled. It was manipulated. And it was designed, you know, rather poorly. But what happened was when we looked at Ethereum, and this goes back to last year, August,

as it transitioned from proof of work to proof of stake, we started, like, we had this epiphany and we're like, oh, my gosh, the risk-free rate for Ethereum was just born. And so how do you think about that? You look at the 700 plus thousand validators. And if you look at the returns that they receive every single day and you annualize it, that's your risk free, like we don't like to say risk-free rate, but that's your benchmark rate for Ethereum. And there's two components to it. There is the emissions, the inflationary emissions that come out.

And then all of those transaction fees. And so we came up with this concept. And then we started watching it. And it was fascinating. Why? Because when FTX happened, people freaked out. We had this issue with counterparty risk. They moved many of their assets on chain.

And we saw Caesar spike because those transaction fees went up. We saw another instance of it spiking with SVB, with Silicon Valley Bank. Again, counterparty risk concerns. People are like, oh my gosh, I got to protect my assets. I got to move them on chain. Caesar spiked. But the largest observation that we've had was during Pepe. When there was so much trading activity, transaction fees went up and it spiked.

Now, what do you do with this thing? Why is it so important? There are really two different applications and ways that you can utilize it. And utility is always something that we think about. First, as a benchmark, think about how many loans in traditional finance reference LIBOR. Over time, we're going to think we expect for a forward curve to be. created, and that will allow us to calculate future value, present value, a discount curve that

allows us to inform valuations of things denominated in Ethereum, things like NFTs, right? So you have all these different benchmark capabilities. If you're a professional staker, and I spoke to many of them, they're excited, like, wouldn't it be great to have a benchmark upon which you perform? And that's kind of cool, is all the benchmarking that you can use it for. But what gets us really exciting, excited is around risk transfer, right? And I come from the derivative space. I come from the future space.

Markets are born when you have hedgers and speculators. And we think, and we're already working with a number of different industry participants on helping them launch a swap product. There are very few fixed rates in crypto. And what we're able to do now, if you're a staker and you swap, the floating rate, then I talked about some of the volatility of the rate, if you're able to swap that for a fixed rate, you can run a much more stable business because you know your income. And again, like in traditional finance, that's a $500 trillion industry. The other thing about it is that

it's global, right? We don't have different rates for different countries. I think over time, it's going to compete with traditional rates and you're going to see it being able to form, like things we have these things called basis swaps in traditional finance, which is a floating for floating. So it'll also be an onboarding capability. But bottom line is that this, we hope, unlocks next generation financial products across Ethereum and beyond. It's a huge unlock if we build social consensus and people use it as a benchmark. Because like anytime you standardize something, it can explode. I mean, look at containerized shipping is something I often talk about. I'm an old naval guy. So it's super excited. Last thing I'll tell you is that it's very,

very interesting and accessible to traditional finance. Why? They really struggle with crypto. We can talk about all the regulatory capital things. Putting crypto on balance sheet is like impossible for them, but they know rates. They love rates. And we think that this is very accessible. They're very interested in Ethereum yield. When you have a synthetic rate like this, again, as that forward curve evolves, super, super interesting. So we're really excited about Coin desk indices, our partner. And hopefully you're to hear a lot more from this in the future. And just to be clear, when you were talking about the different types of products that could be developed, you were talking about both in TratFi and in Defi, I imagine?

100%. We expect for listed products to be released on futures exchanges. They're already talking to us. And so, yeah, you can use it in, it's a convergence product. And ultimately, like, that's part of our core thesis at Coin Fund. We don't think we're going to have, like, crypto and TradFi. Eventually, it's going to come together. And this. This could be a really nice building block that's very acceptable and accessible and to both sides. So I think from a D5 perspective, super interesting. I think from a Tritefy perspective, again, very accessible. All right.

So now let's also talk about AI and crypto, which is another one of the hot topics. And we started to encroach on that earlier. And when we were chatting before this, someone on your team said, AI is everywhere, but we believe AI needs crypto. Crypto doesn't need AI. Talk a little bit about that. Well, I think I mostly agree with that. I actually do think we can go in either direction.

But one of the reasons I think crypto is most applicable to AI is because AI, Laura, has a huge trust problem these days. I think crypto approaches to AI weren't very popular, you know, a year, year and a half ago. In fact, AI people would look at things doing like decentralized, AI model training and say, this is crazy. Why would we ever want to do this? We actually need all the compute we can get to get the model as large as we can.

If we decentralized this, this is slowing us down. But what has happened since then is I think AI has made a huge splash in the public consciousness. GPT3 came out, GPT4 came out, Chad GPT came out. Stability AI launched stable diffusion to compete with, you know, for generative image AIs with with, with Dolly 2, and people have gotten their hands on AI and are starting to really acquiesce the fact that companies that are centralized and have proprietary models are really in a position

to suck up a lot of data from users, maybe even more data than Google has on us at the end of the day. And I think this privacy and trust problem is starting to enter more into the public consciousness. That's one issue. And then the other issue is look at where all of the innovation in AI is actually happening. There's a broader view, not just in Web 3 and crypto, but in the AI space as a whole, that most of the innovation is actually going to happen in open source. And we've seen, you know, again, upon stable diffusion coming out, just the explosion of different people experimenting with these things, creating new models. training, you know, fine-tuning models.

The progress has been absolutely astounding, Laura. Like the time, you know, if you rewind like four years, like the time from when you had a proprietary model to an equivalent open source model was probably years. The time between Dolly 2 and stable diffusion 1.4 was like six, seven months. And now that is compressing even further. And so when I think about Web 3 and AI, what I think Web 3 can do for AI is open up the pipeline that creates these models. And that pipeline starts with data, with talent, a lot of compute in order to train the models, a lot of compute in order to serve the models as APIs.

And then eventually commercialization and productization. Now, what we've seen as a, you know, wearing our investor hat is that most of the really foundational Web3 AI intersection is currently happening in this compute area. Compute is the bottleneck for just about everything in AI. If you look at the open up AI roadmap, you know, almost like every roadmap item is bottlenecked by the availability of GPUs. And commercialization is extremely bottlenecked. by the availability of models, which is why we're seeing this insane proliferation of open models, open large language models like GPT for all. Even Facebook recently released an open source model called Lama 2 that's gotten everybody very excited. And so, you know, where we have been investing is

in this idea of like decentralized training where people can come together and create models that are, you know, maybe as big as a GPT by crowdfunding them and making them open and available. And then also inference for smart contracts. We led around a company called Giza recently, GizaTech.X,YZ. And what Giza does is it makes the outputs of AI models available to smart contracts. And so that really opens up the design space of what smart contracts can do. So you know, you can do things like facial recognition or tech. recognition and a smart contract and automate a lot of those aspects.

I mean, what an exciting time, right? We have these two fundamental technologies that are, I guess, life changing in their own rights. And when you bring them together, amazing things are happening. And Jake's been at the forefront of this. I think we published a paper on it last year. And the amount of talent and the amount of excitement and innovation that we're seeing is like, it's so exciting. And I just can't underscore how exciting it is to be in the space right now at that really crucial intersection. All right. So now let's talk about regulatory issues, which we have touched on here and there in the episode. They're sort of hard to avoid nowadays in crypto. But let's talk about the market structure bill, which again, we briefly touched on.

But that's probably the one that maybe I think, Chris, you could probably tell me better. I think it has the most legs at the moment. Where do you think it's going? Why do you think it's going? Why do think it's important? How do you think it could affect things in crypto if it gets adopted? I had breakfast yesterday with a very senior government official from the UK. And when I run around the world, I have regulators and senior government officials banging their hand on the table saying, please, come to my country, build. We're going to differentiate like very thoughtful, nuanced principles-based regulation. And that was the exact message out of the UK. What we've been lacking in the U.S. is just that. We haven't been looking forward, right? We haven't been coming up

with policies that focus on the technology and actually enable it and empower it and keep us in the lead, right? And so, look, this bill, it's not perfect. But something pretty amazing happened yesterday, and we had the first time that we had legislation unique to crypto advancing out of a committee. There's a long way to go, right? But like I said, the fact that a number of Congress people on both sides of the aisle supported it is a really important data point. And again, as you start unpacking what makes those folks unique, you start really looking at that generational divide that's happening, it really makes you encouraged for the longer term. And so what will this bill do? It will give us clarity. And, you know, I think it feeds really

nicely into some of the work we're doing right now with the CFTC. But at the end of the day, you know, what is a, what should be regulated by the CFTC and what should be regulated by the SEC. It helps provide some clarity. And it also opens up the concept of a digital asset or a cryptocurrency moving between those agencies as its level of decentralization changes. And so I would love, love, love to get to a point where we had empirical measures around those measures of decentralization so that it can be obvious. Like, like, it shouldn't be a, it shouldn't be a surprise. Like, we need to to give our entrepreneurs predictable, transparent ways to operate. And that allows us to, when we invest in companies, you know, we don't want them to spend a good portion of that

investment on legal counsel that's going to come back and tell them, well, we're not really sure. We wanted to take those dollars and invest in people, invest in technology, and invest in their business. And so long way of saying, I'm hopeful that this bill, and again, like, it's an iterative process. XRP gave us some clarity. XRP gave us, I think it's galvanizing Congress to take a little bit more action because some of the results of what I guess we're calling the Torres doctrine counterintuitive, right? And so now Congress is saying, well, wait a second, we need to do something. And we're very pleased that they're doing something. And we're looking forward to these elections to see how, you know, that further progresses us. And when you say that you don't think the

bill is perfect. I know it has to go to the House for full vote. So I'm assuming there is some kind of opportunity to make tweaks. If you could see any revisions be made to it, what would you want to see? I think it's a little bit early on in the process to go into like various specifics of the bill. But what we're really focused on, and by the way, I don't think the House is going to be, I think we'll have some success at the House. But then, you know, there's some, there's a pretty big hill to climb as you go into the Senate as well. And then ultimately the administration and the administration seems to have some very strong thoughts on things like stable coins as well. So right now, I think what we want to do is work with policymakers just on that clarity point.

You know, how can we make sure that our entrepreneurs understand how an individual asset is regulated? What are the rules? And we'll continue to work with a number of different folks to make sure that our voice is heard. And for the stable coin bill, I guess there was an attempt to get Patrick, ranking member Patrick McHenry and sorry, I did it the opposite way. I guess he's the chairman exactly of the House Financial Services Committee. And then the ranking member Maxine Waters to be on the same page about the stable coin bill. So that didn't happen. What does that mean for the stable coin bill?

Like, you know, how far do you think it'll go at this point? What do you think is good about it? What's not? Give us your take. So they've been working on it for 15 months. It's been really hard for me to watch how slow we've been progressing. To me, stable coins are the most incredible opportunity for our country to get right. When you look at the ways, it's an obvious use case in utility. We can deliver efficiency to our companies. We can save costs. You know, the way that, you know, you can reduce remittances by 80% according to the uniswap. The fact is, is like, there are incredible national security opportunities for the United States to get stable coins right. So when you look at all of those things, it's like astounding that we haven't been on the front foot and we haven't really tried to create the conditions so that the U.S. dollar retains and maybe even increases its reserve status.

Like, that's probably what the U.S. government wants. but we have not been on our front foot. I think it was disappointing that after 15 months that we weren't able to, I guess, generate more bipartisan support. But again, when you look at how people voted, it was more along generational lines rather than partisan lines in many cases. And so does this bill have legs? There are some open questions about it. Like, you know, for example, should states have the opportunity to license stable coins? Well, gosh, you know, that's probably a much bigger subject around states' rights.

I personally believe that we'll probably end up in a good place. Look, there's going to be a lot more sausage making that happens. The process is not a clean one. It was designed that way by purpose, by our founders. At the end of the day, we're going to get stable coin legislation. I can't tell you when it's going to happen, but it's going to happen. And when it does, hopefully it'll be in a principled place. But I really hope that our Congress people get their act together.

And frankly, we in the crypto industry should be voicing that. I wrote my congressman and asked for him to take action on it. And so we really need to stay focused and engage. If you look at Coin Fund, that's been our thesis. It's like, we want to engage. We want to engage with regulators. We want to engage with policymakers. And that'll continue to be our approach until we get to a good place.

earlier you brought up the XRP ruling and you did say, so I forget the phrasing you use, but you essentially said that parts of it maybe were confusing or something like that. And there has been talk of the SEC appealing. And I just wondered, you know, what would be your bet on whether or not this would be overturned and just generally what's your take on the ruling? Personally, I was not expecting the ruling. I think most folks were not expecting the ruling in its current form. but it was thoughtful, nuanced, and reasoned,

and I think it is a great starting point. Look, I think the SEC has every right to appeal, but as they appeal further, and so does XRP, by the way, not everything was went in its favor, but the stakes get higher when you appeal. And if this ends up at the Supreme Court, again, that's not how you want to go about clarity,

but as we sit today, gosh, I think XRP looks a lot like oranges and and we'll continue to to move forward accordingly and Coinbase took appropriate action and other exchanges. But gosh, wouldn't it be better if we had like very thoughtful nuanced policies? We put out a paper a while back that talked about how we think about the world. And Jake, I know you've got some strong feelings here as well about like what are the principles that we're trying to solve for? Like some of my thoughts around that are principles based regulation, right? Like maybe we can take a simple example. Like, you know, we see a lot of smart contracts come out there for fundraising purposes and a lot of people end up getting rugged, right? So what is the

what is the most impactful regulation we can have to prevent that? Well, I would argue like, you know, we should use some of the aspects of the technology, you know, in our favor. And one of the, one of the aspects of blockchain technology is that smart contracts are incredibly transparent. They're formally verifiable. You can audit them and see if they have a backdoor. You can create a formal verification system which checks the same. And so one simple thing you can do is require that any smart contract that is raising money from market participants passes a basic principle. It doesn't steal your money, right?

And you can do that in an incredibly technical way. And it seems like very obvious. I often think about in the future that we can trend toward those very productive principles-based approaches that solve some of these problems. And it actually unburdened some of the regulators in a way and makes the enforcement a lot more effective. All right. Well, just last regulatory question, because there are so many directions week ago. If you could just kind of dream up your own little regulatory wish list right now, what are some specific things you'd really like to see? And I'm especially talking about in the U.S.

Gosh, it starts with all principles, right? And again, we put forth a paper on this. What would a good policy have? Well, we would need to have good disclosures to make sure that people understand what they're doing. If you look at legacy traditional markets, you can't understand the disclosures. You have to pay a lawyer a lot of money to explain what you're getting into. So how do you put forth like very thoughtful disclosures? I think client asset protections are very, very important. And yes, there's like technology plays a core role in that. And we should recognize that technology and allow it not say, hey, MPC technology.

It doesn't fit certain qualified rules. So let's get rid of it. No, how do we use technology to solve for those principles? And that principle is something like client protection, right? There are a number of other principles that we believe in. And the other thing that I like to talk about is like the technology that we're applying here that solves for those principles, well, traditional finance should do it too. Because, you know, principles are the same and we should use the best technology at our fingertips to be able to use it. So it should go across the board.

And they should be held to a higher standard as well. And wait, and I'm sorry, when you say that, like what kind of blockchain-based type thing would you apply to Tradfai? Well, for example, I used to run a fairly sizable FX business, and one of the businesses that I ran ran something called Hirstat risk, and it's called settlement risk. And so, like, for example, if I was doing a trade on two sides, like, if I was receiving dollars, they may come in, or if I was paying dollars, they may go out, but I'd have to wait two days for yen to come in, right? Why is that acceptable from a risk perspective? And how do we leverage blockchain technology to close that risk because it's really not acceptable.

And so I think, again, if you start with the principles, we should use the best technology at our disposal to do it. And that's another reason why regulators should really be encouraging things like blockchain technology. And this was a question or some variation of it that I posed to Congressman Torres, but defy and regulating it to protect against the sort of risks we've seen with, for instance, North Korean hackers, you know, going after money in defy smart contracts. How do you think that should be regulated in a way that, you know, preserves people's privacy, but also it doesn't, you know, enrich these thieves and dictatorships?

Yeah, I mean, I'm sure Jake will have some views here as well. But, you know, we don't believe that you, like, how do you regulate the internet? How do you regulate technology itself? Like we should be regulating people and entities, right, and making sure that they're compliant because it's very hard. And I think this is something that people just struggle to understand is this bifurcation of technology and then, you know, entities and people. Wait, but are you saying that you would then regulate, you know, for instance, like front ends in defy or? Yeah, I think to the extent that there was a front end entity that needs to be compliant. But if there's a, if there's technology in the back, like how do you, how do you, how do you, how do you,

regulate technology, it's just technology. And so entities and people, in my mind, should be regulated. Look, I was in the Marine Corps. I don't want to give money to terrorists. I've been shot at by them before. It's not fun. Trust me. And so the one thing that I love that I'm seeing right now is that technology is coming online that allows us to be much more thoughtful around things like certified credentials. And I think that's going to take hold. I personally, you know, the government has very little tolerance for issues of AML and KYC. And so I do think that technology will solve for many of those challenges. Jake, do you have thoughts?

I mean, I'll just say I think technology is a tool and I think regulation is a tool. And regulation would have been really applicable in the case of something like FTX, right, which is a human run organization that should have been held, you know, to a higher standard. I think when you try to apply kind of traditional paper regulation to more advanced technologies like smart contracts and blockchains, you have a bit of an impotence mismatch there, right? Like there's much more effective ways that you can affect kind of the principles-based outcomes that you're looking for using smart contracts. And I don't think like as a, you know, broadly like as a we all collectively as regulators, right, are yet at a place where we're fully appreciating the innovation that has happened in blockchains and in smart contracts. And it will take some time for those kinds of principles-based approaches to make it through.

Laura, you asked what would be on my wish list for this? I think one thing is definitely just a sensible framework where innovative Americans can try some of these technologies. and surface the benefits and make the world into a better place, we do not have that in the United States today. We have an environment of uncertainty, unclarity, and it is extremely dangerous, you know, in the explicit, straightforward sense of that word, to be a founder in blockchain.

And that really should change if the U.S. wants to maintain a lead as an innovator. One thing I'll add, Jake, is that we are working right now with some regulators, and we do believe that the best policy will come from legislation, bar none, right, elected officials. But I was really pleased that the CFTC put forth this GMAC, the Global Markets Advisory Committee. It's one of five committees that they have that advised them. We were named to help participate. And like I said, we met a couple weeks ago and half the day was focused on tokenization, which was great. But what's more exciting is that they did form a digital asset subcommittee. And one thing that they, they reached out to me very

recently, and they said, you know, would you look at NFTs and utility tokens? So like, what's, what's the point that I'm trying to make is that they're engaging? And I think that's really good. We need to do more of it on the NFTs and utility token side of things. I'm super excited because, you know, I don't know all the details of what they're looking for, but if they're looking for ideas and how to thoughtfully regulate it, I know our approach at Coin Fund is to reach out to the community, find the best experts, subject matter experts in the world and really, you know, put forth our best foot to engage them. And so I guess that's how we're going to try to move this this thing forward. And it's an exciting time with that kind of engagement. All right. Well,

it has been a pleasure talking to you both. We had a conversation that went over quite the wide range of topics, but it was good. Where can people learn more about each of you and your work? Thanks, Laura. We just launched our new website at coinfund.io. So please check that out. And we talk a little bit about our team and kind of how we think about the space. And then, of course, follow us on Twitter. I'm JBRUKH on Twitter. And I'm Perkins-C-R-97. Thanks again, Laura. Perfect. It's been a pleasure having you both on Unchained. Thanks, Laura. Thanks so much for joining us today. To learn more about Chris and Jake and CoinFund, check out the show notes for this episode. Unchained is produced by me, Laura Shin,

both up from Kevin Fuchs, Matt Pilchard, Zach Seward, Juan Oranavich, Sam Shrebram, Ginny Hogan, Leandro Camino, Shishonk, and Marka Curia. Thanks for listening.